Tuesday, August 30, 2011

Steve Horwitz and Peter Boettke offered two great examples recently of the real paradox that is the blog Coordination Problem. All the bloggers (and most of the commenters) there are very thoughtful people with great insights and a deep appreciation for economics. But sometimes, despite their thoughtfulness, they start from one very odd premise so that everything they build from it seems shoddy to me. This is unfortunate, because often they've got a lot of great ideas in the post itself.

For Peter Boettke, the odd initial premise almost always has to do with an imagined epic battle with Keynesianism and a very dismissive, condescending attitude towards Keynesianism as being out of the "mainline" of economics running from Smith. He takes it as an article of faith, although he doesn't talk about macroeconomics all that much. Lot's of people are dismissive of Keynesianism without engaging it. You can't engage everything in detail. The problem is Peter goes on to write a post like this one that engages some really important questions about why "bad ideas" persist in government, and the relationship between bad ideas, the generation of bad policy, and the staying power of bad policy. It's an important problem to think about - one of the reasons I like American University is that their department has such a strong political economy focus, so I like seeing Peter think about these questions - but the whole post is based on the idea of Keynesianism as the singular "bad idea" of Western democracies in the 20th century and the mystery of why anyone still believes anything like it - in a crude or sophisticated version. When I read something like this, it makes me wonder if the whole discussion is worth anything. It would be like a creationist discussion of political economy that asked why the "bad idea" of evolution persisted in our educational institutions which are allegedly dedicated to pursuing truth. I think the political economy question is very important, and I'm thrilled someone is asking it. But I wonder if the answer is even worth reading.

Steve Horwitz has a similarly paradoxical post (I have a comment there) - probing and thoughtful, but founded on some very bad thinking about economists who talk about market failure and the quality of the counter-arguments that are posed to them. Crediting Don Lavoie, he suggested that "much of Marx's critique of capitalism is like a photographic negative of what he imagines the socialist world will look like. In other words, the reason that exploitation and alienation are problems of capitalism is that Marx can envision a world in which neither one exists. Specifically, if the participatory but still unified planning of all economic activity (and the elimination of exchange/markets/prices/commodity production) is possible, we will eliminate alienation and exploitation." He then analogized this to modern economists: "Now let's fast-forward to the 1950s and 60s. The number of economists who believe in Marxian central planning has become small. However, for most critics of capitalism, the ground has shifted to "market failure" type arguments. But here's the kicker: the rhetorical strategy is exactly the same as Marx's! What are normally considered "market failures" are only "failures" because the economist is standing in the hypothetical perfect world of general competitive equilibrium and seeing how the real world fails to live up to the model."

No, no, no, no, no. Great questions. Great thoughts on how people think. But the empirical material he's working with is a worthless strawman. I've never had "market failures" taught to me like this, and it infuriates me that apparently this is what people are told others think at George Mason or St. Lawrence University. I will say, though, that it's confusion like this that makes me hate the term "market failure" (as regular readers know, I prefer "externality").

As it so happens, my history of economic thought professor talked about modern market failure economics last night after summarizing the history of thought from Aristotle to Keynes. He didn't present it in these terms at all. He presented how it's always been presented to me. He basically said that starting in the 1870s a lot of the market process insights of Smith were formalized by the neoclassicals. Great. We got much more powerful theory. But this was a first approximation, because the theory clearly wasn't how the world actually worked. So since about Arrow and Debreu (who further formalized the formalizers of the 1870s), a lot of economists have spend a lot of effort theorizing and thinking about how the world actually works. We have a first approximation workhorse model to work with: competitive equilibrium. But it wouldn't be very scientific to take that Platonic ideal and pretend it was anything other than a first approximation.

There was no whiff of the idea that market failures signaled a failure of markets because they didn't live up to some perfect market ideal. He said several times that "market failure" economics (I believe he did use that term) was an effort to understand the way the economy worked using neoclassical tools which was more informative and accurate than the first approximation of Walras, Arrow, and Debreu.

My professor last night wasn't alone - this wasn't the first time I've heard this. He was pleasantly explicit and insistent on this point, but this is how "market failures" were taught to me at William and Mary, and this is how "market failures" were taught to me at George Washington University too. I don't think I've hit on the three schools that buck Steve's general rule of how market failure is taught. There's nothing peculiar about the schools I've been too.

I think people predisposed against liberals or the mainstream or what have you have imputed ideas to this sort of economics that is (1.) wrong, (2.) convenient, and (3.) regularly repeated within their own communities.